Encuestas hacia los clientes

The first set of question addresses the sources of financing for investment in general and for innovation in particular. General investment refers to financing replacement and expansion investment without innovation character. In the survey, firms could choose between ten dif- ferent sources and of course they could indicate multiple financing sources. The ten financing sources can be grouped into 5 broader categories:

 Internal financing (cash flow);

 Equity financing either by issuing new equity/admission of new shareholders or by participation of other firms including VC funding;

 Debt financing through (i) issuing new bonds and debt obligations, (ii) overdraft fa- cilities and credit lines, (iii) targeted bank loans and (iv) other forms such as leasing, factoring or supplier credits;

 Hybrid financing which represents a mixture of equity financing and debt financing such as shareholder loans or mezzanine capital (e.g. dormant equity) and

 Public financing consisting of public subsidies on the one hand and public loans or supportive loans (e.g. from KfW or federal states banks) on the other hand.

In order to reduce the response burden, firms have only been asked to indicate whether they have used any of the ten sources for financing innovation and investment but not to report the share of each financing source in total financing. Hence, when interpreting the following re- sults one should keep in mind that there might be sources which are often used but only to a small extent and which are therefore overrepresented by the numbers. It is the other way round for sources which are less frequently used but given they are used they make an im- portant contribution to the overall financing.

The results of Figure 5-1 show that by far internal financing has been the major source of fi- nancing innovation and investment in the period 2011-2013. 83% of firms with innovation ac- tivities have fall back on cash flow to finance innovation. This proportion is a little smaller for general investment. About three out of four firms with general investments have financed these using internal sources (76%).

Figure 5-1. Sources of funding for innovation and investment projects 2011-2013

83 21 16 14 10 8 6 3 0.6 0.2 76 9 30 36 13 10 19 4 1.2 0.3 0 10 20 30 40 50 60 70 80 90 Cash flow Public subsidy Overdraft facility Targeted loan Shareholder loans Public loan Supplier credit New equity Other companies (incl. VC) Bonds and debt obligations

Share of firms with innovation activities / investments (%)

Innovation Investment

Source: ZEW, Mannheim Innovation Panel.

In contrast, the role of equity financing is rather negligible, at least when we simply look at the proportion of firms that have make use of it. Only 3% of innovative firms have issued new equity or admitted new shareholders in order to finance innovation projects. This proportion is only slightly larger for general investments (4%). Only about 0.6% of innovative firms were able to attract venture capital for financing innovation. But as already mentioned, for those firms that get this type of funding, VC funds may represent an important share of total financ- ing – something we cannot identify with the survey question.

the firms have financed their general investments using long-term targeted bank loans (36%) or short-term oriented overdraft facilities (30%). 19% of the firms have fallen back on other types of external financing like supplier credits, factoring or leasing in order to finance gen- eral investments which themselves could serve as collaterals in external financing contracts. Merely issuing bonds and debt obligations are hardly used by firms for financing investments (0.3%). Overall, external financing is the second most important source of financing invest- ments.

This is in contrast to the financing of innovation where external finance is used much less frequently and where public funding represents the second most important source of financ- ing. About one out of five firms (21%) received public subsidies for innovation. Given the ar- guments represented in the last section, firms have to pay an additional risk premium when using external finance for innovation activities. This makes external financing a less attractive choice. Most intriguing is the fact that firms use short-term overdraft facilities, which are rela- tively costly, more often to finance long-term innovation activities (16%) than long-term tar- geted bank loans (14%). Other types of external financing like supplier credits, factoring or leasing do only play a minor role in financing innovation (6%). The fact that firms use exter- nal finance less frequently and if at all rely more heavily on short-term overdraft facilities is likely to be a signal of financial constraints due to short supply of capital financing. But it could also partly reflect firm’s desire to be independent of any capital investor.

Interestingly, firms use hybrid financing more often to carry out innovation and investment than pure equity finance. 10% of innovative firms have used shareholder loans or mezzanine capital to finance innovation projects. This share is even slightly higher for general invest- ment (13%).

When comparing these figures with results from the 2007 survey (see Aschhoff et al., 2013), we find the financial crisis to have had an important impact on firms’ financing structure of innovation. The proportion of firms that use internal financing in the period 2011-2013 has remained unchanged compared to the period 2004-2006. However, for all other types of ex- ternal, equity or hybrid financing we observe a strong decline. For instance, the proportion of firms using overdraft facilities has fallen from 29% to 16%. The drop is similarly high for tar- geted bank loans (-10 percentage points), shareholder loans (-6 percentage points) and the proportion of firms using equity financing has halved.

Public financing is the only source that has increased importance during the financial crisis and in its aftermath. As a reaction to the financial crisis the federal and state governments have decided to extent R&D support. As a result, the proportion of firms that could fall back on public subsidies to finance innovation has more than doubled from 8% to 21%. Public fi- nance was ranked fifth among the financing sources before the financial crisis but it has be- come the second most important source of financing after the financial crisis. In addition to public subsidies, public loans have also slightly increased (from 7% to 8%).

Given the fact that the use of cash flow has remained stable but all other types of financing except for public funding has decreased, we can also conclude that the proportion of firms

that use only one source of financing – mainly cash flow – has increased and that having mul- tiple financing sources has become less frequent.

Figure 5-2 shows the sources of financing for innovation by main sectors. Overall, we find a very similar financing pattern for R&D-intensive manufacturing, knowledge-intensive ser- vices and other services in terms of ranking of financial sources though the level partly differs across industries. In all three main sectors, cash flow is the most important financing source followed by public subsidies. 36% of R&D-intensive manufacturing firms used public subsi- dies to carry out innovation projects whereas only 20% and 18% of firms in knowledge- intensive and other services could fall back on public subsidies. Though this share was simi- larly high in other manufacturing (19%), public subsidies only come fourth. In other manufac- turing short-term (21%) and long-term bank financing (20%) are much important than in the other three industries. In contrast, only 10% of R&D-intensive manufacturing firms use target bank loans for innovation (rank 5). This reflects the fact that innovation expenditure in R&D- intensive manufacturing contains a much higher proportion of R&D than in other manufactur- ing. In other manufacturing the largest component of innovation expenditure consists of ex- penses for acquiring machines and other equipment. Since these components can be better used as collaterals, it is easier for firms in other manufacturing to use credits for financing in- novation. A similar pattern, though at an overall lower level, can be found for knowledge- intensive services and other services. Like in other manufacturing, expenses for acquiring ma- chines and software are by far the most important component of innovation expenditure in other services.

Compared to other industries, equity financing is relatively more important in knowledge- intensive services. About 4% of the firms have used equity financing to carry out innovation projects. Equity financing is thus the sixth most important source of finance whereas it is placed eight in the other three main sectors.

Table 5-1 depicts the financing structure of innovation by size class. The use of cash flow to carry out innovation increases with firm size. While 81% of small innovative firms with 5-9 employees use internal financing, it is more than 95% among the large firms with 500 and more employees. Small and in particular young firms more often lack internal finance to carry out innovation so that they are more dependent on other sources of finance.

In contrast, no clear size pattern arises for public subsidies. The proportion of firms that get public subsidies for financing innovation varies between 16% among firms with 250-499 em- ployees and 26% among firms with 50-99 employees and large firms with more than 1000 employees. Surprisingly little differences stick out with respect to external financing among small and medium sized companies up to 500 employees. Compared to larger firms they even use external financing more often than larger firms. Of course this is correlated with the fact that larger firms usually have more cash at their disposal to finance innovation and thus have a lower demand for more costly external finance.

Figure 5-2. Sources of funding for innovation projects 2011-2013, by main sector 85 36 23 12 10 8 8 4 2 0.2 81 19 20 9 21 12 9 3 0 0.0 88 20 9 7 7 4 2 4 1 0.4 80 18 15 11 16 7 5 1 0 0.1 0 10 20 30 40 50 60 70 80 90 100 Cashflow Public subsidy Overdraft facility Shareholder loans Targeted loan Public loan Supplier credit New equity

Other companies (incl. VC)

Bonds and debt obligations

Share of firms with innovation activities (%)

R&D-intensive manufacturing Other manufacturing Knowledge-intensive services Other services

Source: ZEW, Mannheim Innovation Panel.

Table 5-1. Sources of financing of innovation in Germany 2011-2013, by size class Number

of employees

Cashflow Public

subsidy Overdraft facility Target loan Share-holder loan

Public

loan Supplier credit New equity Other comp. (VC) Bonds 5-9 81 18 18 14 12 6 4 3 0.5 0.3 10-19 83 23 15 15 11 8 6 2 0.6 0.0 20-49 84 23 14 13 7 9 7 2 0.6 0.2 50-99 82 26 14 16 5 9 6 5 0.6 0.0 100-249 89 24 17 13 7 10 9 2 0.2 0.3 250-499 91 16 18 11 10 10 12 3 0.4 0.6 500-999 95 19 9 10 7 9 7 3 1.4 0.2 1,000+ 95 26 10 13 8 7 7 3 3.3 1.7

Source: ZEW, Mannheim Innovation Panel.

With respect to other sources of finance for innovation, we find that shareholder loans play a more important role among small firms between 5-19 employees than for medium-sized and large enterprises. In contrast, supplier credits and leasing are more important for medium- sized firms. Among medium-sized firms with 100-499 employees, this type of finance is

equally important as targeted bank loans. Both new equity as well as bonds are instruments that are mainly used by large firms to finance innovation.